A Tax By Any Other Name is Still A Tax…

As the Great Storm of 2011 bore down on Hartford (not to mention the big  snow storm that hit on Wednesday night), Keith Phaneuf had a fantastic story in the ctmirror about the massive unemployment tax hike that will hit Connecticut businesses this year.

Full Story: http://ctmirror.org/story/11150/businesses-say-unemployment-tax-hike-goes-unnoticed-capitol

While some legislators and lobbyists for the business community are pointing to the issue as a reason for the state NOT TO ADOPT mandatory sick leave benefits that would impact a select number of Connecticut businesses, the mandatory increase in the unemployment tax is really a much more significant issue and should be considered as part of the overall tax debate in 2011.

Phaneuf’s article should be mandatory reading for every legislator.

The key facts are as follows:

Businesses pay a tax to the Connecticut Unemployment Compensation Trust Fund for every one of their employees.  The fund is used to pay benefits to any employee who is laid off or otherwise qualifies for unemployment benefits.

Since it is a mandated tax based on the employee’s salary, businesses appropriately consider this as part of the employee’s total wage and benefit package.

Due to the massive rate of unemployment, Connecticut’s Unemployment Trust Fund has been “insolvent” since October 2009.  When a state fund becomes insolvent it has to borrow money from the Federal Government.   

Connecticut has borrowed about $530 million to date to cover unemployment benefits for Connecticut residents. States are required to pay the Federal Government interest on any loans plus, over time,they must pay back the full loan.  In this case, due to the extent of the recession the Federal Government delayed the time period when states were required to start making interest payments on their loans.  The waiver period has ended and interest payments must begin this summer. 

The Connecticut Department of Labor has informed business that a new assessment (tax) will be implemented on August 1, 2011 to raise the funds necessary to start paying the Federal Government the interest Connecticut owes on the funds it has borrowed to date.  The new tax is expected to equal to about $40 per worker. 

As Phaneuf notes the new tax “which doesn’t even reduce the $530 million debt principal, is equal to roughly $53 million when projected over nine months. That’s about $12 million greater than the last tax hike the business community faced, a 10 percent surcharge on the corporation tax first imposed in 2009 and set to expire in 2012.” 

Making matters worse, the story goes on to report “State labor officials estimate the unemployment trust fund will need roughly $500 million more in loans over the next 12 months, despite two existing assessments on business that normally provide enough revenue to fund jobless benefits.”  This means the interest assessment will need to be increased at a later date, not to a significantly higher tax in the future to bring in the funds needed to pay the Federal Government back the $1 billion dollars Connecticut will have borrowed to pay unemployment benefits during this recession. 

Finally, in response to these issues, Phaneuf reports that Governor Malloy has said that he hopes Congress will extend the “interest waiver” since 40 other states are facing this problem.  An extension would allow Connecticut to postpone having to address this problem for year or more but the interest and loan will still need to be paid in the relatively near future.

 The bottom line is that an increase in the unemployment tax is needed – sooner or later – and elected officials, the business community and everyone involved in the budget making process must recognize that the upcoming unemployment tax surcharges are, in fact, very real tax increases and must be part of the overall tax plan to get Connecticut out of this fiscal crisis.